Banks’ rising request from CBN lending window raises concern
The rising incidence of requests for short term loans from the Central Bank of Nigeria (CBN) by deposit money banks through the Standard Lending Facility (SLF) is raising some concerns.
The CBN Standing Lending Facility (SLF) is an overnight advance available to deposit money banks and discount houses.
According to the CBN’s latest report on the sector, the average request for SLF, inclusive of intra-day liquidity facility (ILF) in the first half of 2017, amounted to N227.52 billion, in 122 transactions, while the actual daily requests ranged from N83.61 billion to N478.54 billion.
Total interest earned was N21.13 billion. In comparison with the first half of 2016, SLF amounted to N42.55 billion in the 85 transaction days with a total of N2.92 billion earned as interests. SLF was utilized by the banks in order to enable them square up their positions after inter-bank market trading hours.
“The rise in average daily request of deposit money banks from the Standing Lending Facility (SLF) window despite the fact that interbank call and OBB rates in April 2018 declined drastically to 3.34% and 2.96% respectively from 15.16% and 12.69% in March 2018 remains a concern,” said Robert Asogwa, MPC member in his statement following the last Monetary Policy Committee (MPC) meeting, which was released on Wednesday.
“These are all early warning signs of future threats to stability in the banking industry and as such, any significant reduction of Monetary Policy Rate (MPR) at this time could even further weaken the solvency position of these deposit money banks.”
The banking industry on aggregate is said to remain strong with increases in profitability, liquidity, total assets and total deposits.
The Deposit Money Banks’ Capital Adequacy Ratio (CAR) increased while the non- performing loans ratio which from CBN staff report had increased to about 16.21 percent in February 2018 declined to 14.15 percent in April 2018.
In spite of some improvements in these financial soundness indicators, the banks’ have continued to borrow from the CBN’s discount window leading to a rise in their average daily request from the window.
Ayodeji Ebo, managing director, Afrinvest Securities limited, said the increase in the level of Banks participation at the CBN discount window signifies higher needs of cash to meet short term obligations.
“The rise in the level of takings/borrowings at the Standing Lending Facility window may signify that some banks have very low liquidity levels, hence borrow to meet those obligations. Moreover, it may also signify a problem of Assets and Liabilities mismatch,” Ebo said.
Asogwa said while inflation, output, interest rate and exchange rates at both the domestic and international levels may be key focus areas in shaping the monetary policy decision, there are significant downside risks with the potential to reverse any expected maximum impact of the monetary policy decision at last MPC meeting. These risks include mixed performance of banking sector Indicators and the stock market.
Of greater concern, he said is the size of banking sector credit to the private sector which is now declining and even at poorer levels when compared to the situation at the last MPC meeting.
CBN Staff report show that the industry gross credit recorded a 3.63 percent decrease in April 2018 and the lowest total ever since January 2017 and this happened despite the reported increases in total industry deposits.
In his own personal statement following the last MPC meeting, Joseph Nnanna, CBN’s deputy governor, said the banking industry continues to grapple with low profitability and a high ratio of NPLs weighing on any recovery in credit growth.
The industry is still reeling from the impact of the collapse in oil prices between 2014 and 2016. The oil sector which accounted for about 7.2 percent of Nigeria’s real GDP in Q4 2017, and accounted for a major channels of credit demand and foreign currency revenue is yet to fully recover.
While the recovery in oil prices offers hope to the banking industry, this may not likely impact on lending and asset quality in the next few months.
“Consequently, the combination of rising oil prices, settlement of federal government contractual obligations to the private sector creditors including stronger economic growth may reduce NPLs, improve asset quality and sustain financial stability,” Nnanna said.
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